• Inflation contracted further in November due to declines in costs of transport, housing & utilities, furnishing & household equipment and prices of clothing & footwear
• Core inflation, which excludes administered and volatile price items, eased to 0.7% yoy in November, its lowest level since May 2019 (0.8% in October)
• We expect headline inflation to decline by 1.1% in 2020 before trending higher to around 2.0% in 2021.

Costs of transport contracted further by 11.1% yoy in November

Malaysia’s headline inflation contracted further by 1.7% yoy in November from -1.5% in October. The country’s inflation has been in negative territory for the ninth consecutive month since March 2020. The larger contraction in inflation was attributed mainly to declines in costs of transport, furnishing and household equipment and housing & utilities, as well as prices of clothing and footwear. Costs of transport contracted further by 11.1% yoy in November from -10.2% in October, in tandem with the lower domestic retail petrol price of RON95, which averaged RM1.63/litre in November as compared to RM2.08/litre in November 2019. Core inflation, which excludes administered and volatile price items, eased to 0.7% yoy in November from 0.8% yoy in October, its lowest level since May 2019. Headline inflation was also dragged down by costs of housing and utilities, which contracted by 3.3% yoy in November, partly due to ongoing electricity discounts. Prices of food and non-alcoholic beverages eased to 1.4% yoy in November, down slightly from 1.5% in October. Prices of miscellaneous goods and services, education, cost of health, recreation, services and culture showed slight positive increases, while costs of alcoholic beverages and tobacco and communication remained stable in November.

In the first eleven months of 2020, the country’s headline inflation rate contracted by an average of 1.1% yoy compared to +0.6% in the corresponding period last year. The low inflationary environment was due mainly to decline in costs of transport, attributed to the high base of domestic retail petrol prices in the previous year, where retail fuel price of RON95 was capped at RM2.08/litre throughout 4Q19 compared to RM1.78/litre currently. In addition, the electricity discount, which was extended until December 2020, also put some downward pressure on inflation. For the full year, we are projecting headline inflation to average around -1.1% in 2020 (0.7% in 2019).

Going into 2021, we expect headline inflation to trend slightly higher due partly to the low base effect from lower domestic retail petrol prices and electricity tariff rebate in 2020. We expect higher global oil prices and improvement in economic activity to put some upward inflationary pressure next year. For 2021, we are projecting the headline inflation to average around 2%, as compared to the official forecast of between 1% and 3%. On monetary policy front, despite cautioning on the downside risks from ongoing uncertainties surrounding the Covid-19 pandemic globally and domestically, we believe BNM will likely maintain its policy interest rate at 1.75% throughout 2021 (after having cut by a cumulative 125bps in 2020), which is considered to be accommodative.

Source: Affin Hwang Research - 24 Dec 2020